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Tuesday, April 22, 2008

Tampa Bay Lightning Sale to Proceed; Can Koules Avoid Bankruptcy?

It seems as if the sale of the Tampa Bay Lightning to Hollywood mogul Oren Koules and OK Hockey will be completed after all. The sale was in jeopardy when French bank Societe Generale who agreed to lend to Koules was rocked by the largest trading scandal and fraud in bank history. According to reports they lost 7.2 billion dollars when a single trader, Jerome Kerviel orchestrated a series of transactions that spiraled out of control as the world financial markets became exposed to the US sub-prime credit mess.

Koules then could not get another bank to finance him, as lending standards and credit markets tightened in response to the bursting of the sub-prime mortgage bubble. In response to this, current Tampa Bay Lightning owner Palace Sports and Entertainment has agreed to finance Koules, until the credit markets loosen up and he can get another bank to finance him. Apparently they will provide him with as much as half of the purchase price of $200 million. Should Koules and his partners get in over their heads, Palace Sports and Entertainment will foreclose on the loan and re-take the team. After the paperwork is completed later this week, the last hurdle for the deal to go through is league approval.

This deal looks fishy to me. The fact that Koules and his partners needs to finance up to $100 million is a huge red flag. It's obvious that he doesn't have the assets to afford to buy the team. Sports is not a great business, it requires ever increasing amounts of capital to be re-invested, usually in players, but every ten years or so in the arena and ten years later in a new building. People usually don't make huge amounts of money running a sports franchise. On top of that, the Lightning have had problems for a long time, not with their revenues, but with their profitability. They have reportedly lost $76 million since 1999 and have never had a year in the black, save for their Stanley Cup winning season. This, despite sellout crowds and strong fan support for many years, not to mention the fact that "the city and county picked up millions over those years for the team in ancillary charges such as property taxes and parking revenue shortfalls." Koules and his partners will have a hard time breaking even, let alone making enough for them to repay the loan.

It seems that what Koules and his partners are banking on is the 5 1/2 acres of land they're acquiring along with the team. In February, The Globe and Mail ran a story suggesting that former NHL player and current property developer Len Barrie was poised to become a significant investor in the team. The report suggested that he had participated in discussions with other Lightning executives on the direction of the franchise, and was part of Koules's first attempt to buy the Lightning with Absolute Hockey Enterprises. Barrie for his part, denied being part of the first group. I don't know whether that story was a case of fanciful journalism, putting two and two together, but it makes a lot of sense. The only hope they have of making any money is to develop that property with the way the Lightning are bleeding cash. Also the fact is it will probably only get worse, as the team's attendance may decrease and ticket prices may have to go down due to their last place finish this year. However, unless they create Disneyland 2.0 or the next Augusta National golf course, it's highly unlikely they will make enough to repay their loan.

Should this happen, Koules may suffer the same fate as another mega-debtor, Rod Bryden did in Ottawa, bankruptcy. If this happens, unless there is a benevolent Tampa billionaire willing to buy the team simply to keep it there, the team will likely have to end up moving.

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